Sector Update Automobiles HMSI s expansion could result in short-term pressure on HMCL and BJAUT Valuations reasonable, but demand recovery key for stock performance Honda Motorcycle and Scooter India (HMSI) aims to grow its volumes by 43% to 3.9m units in FY14. Given the scheduled commissioning of its third plant in May 2013, launch of cheaper products for the mass market and track record of meeting its sales guidance, we too believe that HMSI would continue to grow strongly. Apart from capacity addition and new model launches, network expansion would be a key growth driver (as has been the case in FY13). Based on our network analysis, we believe that despite its aggressive network expansion over FY11-13, there is still significant scope for HMSI to continue expanding. We expect two-wheeler volume recovery to be back-ended in FY14, with near-term volumes remaining weak. This coupled with HMSI s continued capacity, dealer network and product portfolio expansion could result in sustained pressure on Hero MotoCorp (HMCL) and Bajaj Auto (BJAUT). While valuations for both these stocks are reasonable, demand recovery along with stability in competitive intensity would be the key driver for stock performance. Our network analysis: Key findings To better understand HMSI s scope for network expansion, we analyzed its distribution network vis-àvis market leader, Hero MotoCorp (HMCL). We list below the key findings of our study: HMSI expanded its dealer network by 50% over FY11-13; network expansion contributed 40% of incremental volumes: HMSI expanded its dealer network by 50% over FY11-13 to 630 dealers (as at March 2013). Dealers have more than doubled in the eastern region and have increased by 39-45% in other regions. We believe network expansion contributed 40% of the incremental volumes over FY11-13. Scope for further expansion in primary network (dealers) seems limited; secondary network still under-represented compared to HMCL: With 630 dealers, HMSI s dealer reach is ~80% of the market leader, HMCL (760 dealers), implying limited room for rapid expansion. In fact, in the top-100 cities, HMSI s dealer count is similar to HMCL s. However, HMSI s secondary network is still 60% of HMCL s network. HMSI has ~1,120 sales touch points compared to HMCL s ~1,800, implying significant scope for expansion. Despite sharp growth over last couple of years, HMSI s sales per dealer still half of HMCL s: HMSI s sales per dealer are still half of HMCL s. Moreover, its motorcycle sales per dealer are just 25% of HMCL s. Secondary network expansion, further capacity addition and inventory optimization should aid volume growth in FY14: We believe HMSI would continue to grow strongly in FY14. Capacity addition (third plant likely to begin production in May 2013), new launches (cheaper motorcycles under Dream series, 90cc/125cc scooter launches), network expansion (largely secondary network) and inventory optimization would drive growth in FY14. Financials and Valuations EPS (INR) EPS Gr. (%) P/E (x) P/CEPS (x) EV/EBITDA(x) RoE (%) Payout (%) Div. yield (%) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E Bajaj Auto 123.5 142.7 19.5 15.5 15.0 13.0 14.3 12.4 9.8 8.1 44.0 41.8 56.8 53.0 3.2 3.5 Hero Moto 112.5 153.7 6.1 36.6 15.2 11.1 13.3 9.3 8.8 7.3 41.9 48.0 66.4 56.1 3.8 4.4 Jinesh Gandhi (Jinesh@MotilalOswal.com) + 91 22 3982 5416 Chirag Jain (Chirag.Jain@MotilalOswal.com) + 91 22 3982 5418 1 Investors are advised to refer through disclosures made at the end of the Research Report.
Post split with Hero, HMSI has expanded capacity by 2.5x HMSI s third plant to commission in May 2013; capacity to reach 4m units Rapid capacity expansion; 2.5x since FY11: Post split with Hero, HMSI commenced its second plant at Rajasthan in August 2011, with additional capacity of 1.2m units (taking total capacity to 2.8m units). In May 2013, HMSI is likely to commence its third plant in near Bangalore, expanding capacity further to 4m units. New plant can be expanded further, taking total capacity to 4.8m units: Our industry interaction indicates that the new plant can be further expanded, taking total capacity to 4.8m units. Capacity utilization high at existing facilities Aggressive portfolio expansion to continue, particularly in mass market motorcycle segment Product portfolio earlier catered to urban and semi-urban markets: Since inception, HMSI s product portfolio has largely catered to urban/semi-urban customers, with scooters and premium motorcycles being its primary focus areas (to avoid headon clash with erstwhile partners portfolio). HMSI enters mass market segment with Dream series of motorcycles: Post Honda s split with Hero, HMSI has entered into the mass market motorcycle segment, with the launch of Dream Yuga and Dream Neo (110cc motorcycle) to compete with HMCL s Splendor/Passion motorcycles. We expect HMSI to further expand its motorcycle offerings, particularly in the entry-level segment (competing with HMCL s CD Dawn/Deluxe, BJAUT s Platina). Expect launch of Dream Yuga (HET version) and two new scooters (125cc & 90cc) in June 2013 Date Name Category Engine size Jul-01 Activa Scooter 102 Sep-02 Dio Scooter 102 May-03 Eterno Scooter (Geared) 150 Oct-04 CB Unicorn Premium 150 Apr-06 CB Shine Executive 125 Jul-08 CBF Stunner Executive 125 Jan-08 Aviator Scooter 110 Mar-09 Activa (upgrade) Scooter 110 Dec-09 CB Twister Executive 110 Mar-11 CBR250R Premium 250 Mar-12 CBR150R Premium 150 May-12 Dream Yuga Executive 110 Jan-13 Activa (upgrade) Scooters 110 Apr-13 Dream Neo Executive 110 Jun-13E Dream Yuga (HET) Executive 110 Jun-13E 90cc Scooter (competing with TVS Scooty) Scooter 90 Jun-13E 125cc Scooter (competing with Hero Maestro) Scooter 125 2
50% increase in distribution network since split; aggressive plans for further expansion 50% growth in dealer network since Hero-Honda split: As of March 2011, HMSI had 418 dealers (primary network). Post the Hero-Honda split, HMSI has rapidly expanded its dealer network, as it added capacity and entered the mass market motorcycle segment. HMSI currently has 635 dealers, a growth of 50% over FY11-13. Dealers in eastern region more than doubled: Network expansion has been the steepest in the eastern region, where it has more than doubled the number of dealers in FY13. HMSI s presence in the eastern region was relatively low, as this is primarily a market for 100-110cc motorcycles. Targets 2/3rd of sales from semi-urban and rural areas by 2020: Prior to the split with Hero, HMSI had limited presence in semi-urban and rural regions, as its product portfolio largely catered to urban markets. However, over the last two years, HMSI has been aggressively expanding its network expansion. At the time of the split, urban markets accounted for almost 2/3rd of HMSI s sales. By 2020, HMSI expects rural markets to account for 2/3rd of sales, with the contribution of urban markets declining to 1/3rd. HMSI s dealer network expanded by 50% over FY11-13 Dealers in East/North East India have doubled over FY11-13 HMSI s dealer network equal to HMCL s in top-100 cities 3
HMSI s dealer strength now 80% of HMCL s but secondary network still 60% of HMCL s Regional split of HMSI and HMCL distribution network Distribution expansion a key driver for strong growth in FY13 for HMSI HMSI s domestic volumes have grown by 70% in FY13 over FY11. Our analysis indicates that network expansion has been the key growth driver (contributing 40% of growth), supported with growth in the scooters segment (24%) and new launches (20%). Network expansion key growth driver over FY11-13 (%) 4
Secondary network expansion, further capacity addition and inventory optimization should aid HMSI's volume growth in FY14 HMSI targets to increase its touch points (including service network) by 25% to 2,500 by the end of FY14. We believe HMSI would continue to grow strongly in FY14. Capacity addition (third plant likely to begin production in May 2013), new launches (cheaper motorcycles under Dream series, 75cc/125cc scooter launches), network expansion (largely secondary network) and inventory optimization would drive growth in FY14. HMSI aims to grow its volumes by 43% to 3.9m units in FY14. We note that HMSI s track record of meeting its sales guidance has been almost impeccable. Despite high growth, per dealer sales still half of HMCL s and motorcycle sales per dealer just 25% of HMCL s However, sales per touch point represents real picture New launches, network expansion to continue driving growth in FY14 5
Almost impeccable track record of meeting guidance Trend in domestic 2W market share movement (%) Trend in Hero's domestic 2W market share and margins Outlook and view I. Scenario analysis for FY14 a.implied volumes for HMSI, assuming volume growth of 8% for the industry, 3.6% for HMCL and 5% for BJAUT 6
b.implied volumes for BJAUT and HMCL, based on our HMSI growth assumption and domestic industry growth of 8% c.implied industry volume growth is 11.8%, based on HMSI s target 3.93m and our estimates for HMCL (3.6%) and BJAUT (5%) II. Industry demand to remain sluggish in FY14, with back-ended recovery Our channel interactions indicate continued weakness in retail demand and consequent higher channel inventory. Customers are postponing their purchases in view of lower income growth, high inflation and high interest rates. Dealers expect demand to remain sluggish in the near term. Pick-up in demand is likely during the festive season (September-October 2013), with expected increase in economic activity due to monetary easing and pre-election spends. We expect the two-wheeler industry to register 8% growth in FY14, driven by pick-up in demand during 2HFY12, supported by low base. III. Though no cash discounts, competitive pricing to keep margins in check Considering the weak demand environment and capacity additions by HMCL and HMSI, we expect the competitive environment to remain tough. While we do not expect the two-wheeler majors to offer cash discounts (barring dealer-specific discounts), we believe the pricing power of two-wheeler companies would come under pressure. Two-wheeler companies are pushing sales through offering attractive finance schemes/other freebies such as 5-year warranty offered by Hero as a standard feature on all its products. 7
IV. Pain to persist for some time, though valuations compelling post stock price correction We expect two-wheeler volume recovery to be back-ended in FY14, with nearterm volumes remaining weak. This coupled with HMSI s continued capacity, dealer network and product portfolio expansion could result in sustained pressure on HMCL and BJAUT. While valuations for both these stocks are reasonable, demand recovery along with stability in competitive intensity would be the key driver for stock performance. We believe BJAUT's business model as superior and expect it to trade at a premium to HMCL given its well diversified product portfolio, significant headstart in exports, well positioned global strategic alliances, premium profitability and consistent step-up in dividends. The stock trades at 15x/13x FY14/FY15E EPS of INR123.5/142.7. Maintain Buy with target price of INR2,140 (15x FY15 EPS). HMCL would be the biggest beneficiary of demand recovery, which is expected to return in 2HFY14. Its strong franchise of Splendor and Passion and wide distribution reach makes it best placed to tap strong demand growth, especially in rural markets. Current valuations of 15.2x/11.1x FY14/FY15E EPS appear attractive relative to BJAUT. Maintain Buy with a target price of INR2,150 (14x FY15E EPS). Considering current valuations, we prefer HMCL over BJAUT over the near term. Financials and Valuations EPS (INR) EPS Gr. (%) P/E (x) P/CEPS (x) EV/EBITDA(x) RoE (%) Payout (%) Div. yield (%) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E Bajaj Auto 123.5 142.7 19.5 15.5 15.0 13.0 14.3 12.4 9.8 8.1 44.0 41.8 56.8 53.0 3.2 3.5 Hero Moto 112.5 153.7 6.1 36.6 15.2 11.1 13.3 9.3 8.8 7.3 41.9 48.0 66.4 56.1 3.8 4.4 8
N O T E S 9
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